Although Deutsche Bank does not disclose its overall spend on external legal advisers, it confirms a 2:1 ratio between external and internal legal spend – that is, for every dollar spent on in-house lawyers, two dollars were spent on outside advisers. This ratio has remained stable over the past five years.
This may perhaps add some perspective to all the talk about the mixed future awaiting law firms; at least, when looking at Deutsche’s experience, a scenario stipulating that legal work will increasingly move in-house has so far failed to materialise.
Around a third of Deutsche’s overall legal spend goes on litigation and regulatory work, with approximately two-thirds on transactional work. During the recent financial crisis, predictably, the importance of litigation and regulatory work increased, whereas transactions took a hit.
1. Origins and significance
Initially the idea of standardising the instruction of external counsel met huge resistance.
“We were told this would never work in banking,” says Rose Battaglia, global chief operating officer at Deutsche for legal and compliance. “Everyone thinks their transaction is non-standard or bespoke.”
However, Deutsche’s in-house lawyers continued to discuss the idea in industry groups and in regular discussion groups of general counsel, eventually introducing the bank’s IT-based system ‘Click4Legal’ in November 2007.
According to an internal presentation, the objective of the system was “to further control and obtain greater transparency and reductions on external legal services”.
Another goal was to facilitate a tracking process for external legal counsel instructions and billing.
The system was implemented in Deutsche’s global markets division and was to be used for all transaction-related spend on external legal counsel.
Deutsche’s global markets include fixed income and equity practice and is the bank’s largest area of legal spend. Initially not covered by Click4Legal was legal spend related to potential or threatened litigation, all regulatory investigations, potential defaults, workouts and HR issues. Currently around 50 per cent of global market’s external legal spend is managed through Click4Legal, but this figure is continuously increasing.
2. Initiating the tendering process
Workflow through the system starts inside Deutsche with the business person (requestor) who needs legal assistance. They log onto the system and initiate a legal services request. Fields that have to be filled in include primary jurisdiction coverage, details of service requested, service delivery date, expected deal revenue and expected legal spend. Expected legal spend has to be allocated to an internal cost centre.
Finally, the request is given an ID so that requestors can check the current status of their various requests online. The request is then forwarded to the requestor’s business manager for approval and to confirm where the cost will be charged.
Next, there are two possibilities. Usually the request goes through Deutsche’s in-house legal department (DB Legal). DB Legal’s role is to “identify external legal counsel able to deliver requested services, obtain and capture all relevant quotes, select and instruct appropriate external counsel and notify [the requestor]”.
However, sometimes the requestor can go straight to external counsel without prior involvement of DB Legal by checking a desk instruction box in the original request. Only pre-vetted, approved law firms can be instructed in this manner and only around 13 per cent of all requests qualify for desk instruction.
Irrespective of whether the business desk itself or DB Legal is tendering the request, common tendering guidelines apply for all transactions in Click4Legal. Deutsche will “tender quotes from at least two, preferably three, external counsel for all transactions, including new product development and pre-deal research”.
3. Permitted exceptions to the standard quotation process
- In certain instances the system allows the requestor or DB Legal
- to approach an external counsel without the need for competitive tendering.
- Legal will not tender when:
- Any modification to previous ISDA, netting or other opinion is needed from the external counsel who provided the original opinion.
- A specific transaction is being modified or repurchased where external counsel has provided the previous deal documents.
- The transaction is part of a programme (a bundle or a group of trades) that has been tendered within the previous 12 months. Opportunities will be sought for discounts based on increasing volumes under the programme.
- An authorising party (eg external client or lead bank in a syndicate) selects the outside counsel who will handle the transaction.
- Matters of corporate housekeeping when there is a law firm in place handling corporate housekeeping for that entity.
- There is no alternative expertise that can be obtained in specific emerging markets, unique jurisdictions or areas of expertise.
A list of these is maintained by the legal services team (LST) and reviewed annually.
4. Tendering process… continued
The LST, like DB Legal a subdivision of Deutsche’s risk division, has a mission statement of ensuring “a seamless implementation and adoption by external counsel” of Click4Legal. The LST is made up of paralegals and analysts, not lawyers, and provides adminis-trative assistance to both Deutsche and its external legal counsel.
LST personnel fill in one half of a so-called standard quote template (SQT), while the other half is filled in by those external lawyers who wish to participate in the tendering process for a particular request. The LST has to make sure the ‘standard quote template’ contains a brief summary of the term sheet details needed for external counsel to formulate properly a quote. It has to be indicated whether templates for the transaction already exist, whether the request is a potential repeat transaction and whether an accurate (capped) or an hourly quote is required. Hourly quotes are only used for particular pieces of work, never for the bulk of a transaction.
5. Bids by law firms
Only panel firms are invited to tender unless a specific legal knowledge is not available within Deutsche’s panel firms, when a non-panel firm will be invited to compete. The external lawyers then have to fill in the SQT, including entering “a detailed description of the services which will be provided, including indicating if drafting will be template-based or specialised/ tailored contract drafting and if translations are required”; they must also “specify the number of documents required by document type and provide an explanation/ specific reason for each document requested”. Estimated staffing levels required to complete the transaction have to be provided in detail. Finally, and obviously, a quote has to be proposed.
Usually the best (ie cheapest) quote wins. There is an exception process for when a Deutsche lawyer does not think the cheapest firm is the right firm to select. However, this is discouraged and requires a strong justification, but will be granted if appropriate, according to Battaglia.
6. Regular feedback to external suppliers of legal services
An interesting part of Deutsche’s Click4Legal system is the feedback given to external lawyers. Regular reports are provided to several of the top-tier law firms participating in the tendering process through Click4Legal. For a given period of time these reports indicate how often the law firm had bid for work, which bids were successful and – crucially – for those bids that were unsuccessful the report indicates the percentage by which those law firms’ bids were higher than the winning bid.
This practice enables law firms to re-evaluate their bidding strategies and for example decide that it is no longer viable to bid for a certain type of work that can be undertaken much cheaper by a competitor.
7. Evolution of the system
So far the introduction of Click4Legal has been a success story for Deutsche. With the help of the system Deutsche managed to reduce its legal fees by around €20m (£16.55m) in 2010. Other general counsel’s interest in the system is said to be running
high and Deutsche has been in discussion with an e-billing vendor to integrate its software with the system.
After global markets, Deutsche rolled out Click4Legal in its other divisions, such as global banking, asset management and private wealth management. Equally, after an initial focus on transactions-related legal spend, Click4Legal is increasingly being used to manage legal spend on litigation or regulatory matters as well.
To repeat the observation of Battaglia, “everyone thinks their transaction is non-standard or bespoke”. That may or may not be the case, but this is no longer an obstacle to their transactions being subject to competitive tendering.
Currently there is no consensus as to the effects of online bidding procedures on law firms’ behaviour. Some observers think firms are playing along reluctantly for now, but really they are waiting for a better business climate, when legal services will again become a seller’s market. In the meantime these law firms achieve the required cost reductions through margin compression, not altering their fundamental business models by much.
On the other hand, you may accept the proposition that systems such as Click4Legal have killed the billable hour permanently for certain types of legal work. This has important consequences for a law firm’s business model and its internal culture.